Michigan Oil Co. v. Natural Resources Commission

No. 24747 (249 N.W.2d 135, 71 Mich. App. 667) (Mich. Ct. App. October 19, 1976)

ELR Digest

The court upholds the denial by the Director of the Department of Natural Resources (DNR) of oil drilling permits in the Pigeon River State Forest notwithstanding the existence of valid oil leases. The Pigeon River Forest is a large, relatively unspoiled tract of mostly state land that contains the only sizable wild elk herd east of the Mississippi as well as many other types of animals. In 1968, DNR let oil leases in the forest without considering the possible effects of drilling on state lands; DNR's decision was based on the view that no one would actually drill. In 1971, appellant's predecessor in title applied to drill on a portion of one of these leases. DNR turned down the application on the grounds that the drilling would cause "serious and unnecessary damage" to area wildlife and that drilling should be delayed pending completion of a forest management plan.

DNR and the Commission have the power to decide whether and on what terms to lease. Mich. Comp. Laws Ann. § 299.3a. The DNR Director, as Supervisor of Wells, has the power under the Oil Conservation Act, Mich. Comp. Laws Ann. § 319.1 et seq., to grant or deny permits to drill. Included in this authority is the power to prevent "waste" from oil and gas operations on state lands. Although the dissent correctly points out that the Commission is attempting to rectify a mistake, nothing prevents a public agency entrusted with the protection of the state's natural resources from correcting prior errors so as to benefit the public. The denial was not based solely on DNR's duty to prevent waste, but also on its authority as trustee to protect state-owned lands. The Oil Conservation Act is not limited to allowing DNR only to prevent waste directly connected with oil and gas production. The statutorily-required "ordinary meaning" of waste encompasses damage to natural resources incidental to oil production.

Denial of the permit did not effect an unconstitutional taking of property without just compensation since the primary value of the property is not lost. Appellant's property interest is derived from a contract with the state and subject to Commission rules under the police power. See Robertson v. Commissioner of State Land Office, 44 Mich. 274, 6 N.W. 659 (1880). The lease does not guarantee a right to drill. That no rules existed at the time of denial is immaterial.

Appellant's argument that the Commission's action is illegal zoning is merely a play on words. Furthermore, substantive due process requires only that a standard used by a state agency be as reasonably precise as the subject matter permits. Michigan State Highway Comm'n v. Vanderkloot, 392 Mich. 159, 220 N.W.2d 416, 4 ELR 20694 (1974). The Commission neither impaired a contract nor is estopped from its action. Mere breach of contract by a governmental agency is not an impairment of contract. Thompson v. Auditor General, 261 Mich. 624, 247 N.W.2d 360 (1933). The open-ended provision in the lease concerning the application of DNR rules prevents DNR from being estopped. Nor does the permit's denial constitute a denial of equal protection. Although earlier permits have been granted for nearby leases, appellant has not shown that the Commission's later consideration of "waste" regarding its permit constitutes arbitrary action.

Circuit Judge Peterson, in dissent, argues that the DNR arbitrarily denied the drilling permit by calling the very act of producing oil and gas "waste" injurious to the environment. Especially relevant is that the record nowhere supports the Commission's finding that ecosystem damage is unnecessary within the meaning of the Oil Conservation Act. The Act's thrust is to promote efficient production of oil and gas. Nowhere does the Act grant authority to deny a drilling permit to prevent future waste. Also, the trial court erroneously interpreted the statute to allow permit denial on ecological grounds. The Act requires issuance of a permit except for noncompliance with departmental rules, of which there are none. Furthermore, denial of the permit destroys the lease's value. See Spanich v. Livonia, 355 Mich. 252, 94 N.W.2d 62 (1959); Union Oil Co. of California v. Morton, 512 F.2d 743, 5 ELR 20218 (9th Cir. 1975). The public trust theory is inapplicable here, since it deals only with submerged Great Lakes lands.

The full text of this opinion is available from ELR (22 pp. $2.75, ELR Order No. C-1107).

Counsel for Appellant
John Sklar
Honigman, Miller, Schwartz & Cohn
2290 First National Bank Bldg., Detroit MI 48226
(313) 962-6700

Counsel for Appellee
Frank J. Kelley, Attorney General; Robert A. Derengoski, Solicitor General; Jerome Maslowski, Ass't Attorney General
Law Building, Lansing MI 48913
(517) 373-1130

Counsel for Intervenor Pigeon River Country Association
Peter J. Vellenga
Vellenga & Blumberg
Gaylord MI 49735
(517) 732-2469

Bronson, J., joined by Kelly, P.J.; Peterson, J., dissents.

[OPINION OMITTED BY PUBLISHER IN ORIGINAL SOURCE]